Home Prices in California Continue to Climb. What Sets it Apart From the Rest of the Country?

A May 2014 survey called the Realtors Confidence Index conducted by the National Association of Realtors detailed where Realtors expect the most growth in home prices throughout the nation. The parts of the country where Realtors expected the most growth, between 5%-7%, included Oregon, California, Colorado, Hawaii, Texas, Georgia, and Florida. The figure below depicts this growth:

*click image to enlarge

The states in red possess a combination of low home inventory levels, strong cash sales, and strong growth sectors such as technology companies in Northern California and oil throughout.

While the most growth is expected in these states, Housing Wire reported on trends in the rest of the United States, “Realtors show they generally expect home prices to increase in all states and the District of Columbia over the next 12 months, with the most heavy growth in Florida, Texas, and California, among other states”. The median expected price increase throughout the country is at 4%.

These expectations of course rely on supply and demand of homes on the market, as well as demographics in each area and job growth in the state as well. The article maintained that Realtors have modest expectations about overall economic and job prospects in the United States. On top of home prices on the rise, the number of foreclosures and underwater homes has decreased significantly, even in some areas of the country that were hardest hit by the financial crisis. The Los Angeles Daily News notes, “last month, foreclosure resale’s—homes foreclosed in the prior 12 months – accounted for a 5 percent share of the region’s market, down from 9 percent a year earlier. Short sales – transactions where the sale price fell short of what was owed on the property – accounted for a 6 percent share, down from 15.5 percent a year earlier”. However, there are quite a few other factors that play into the Real Estate market in California specifically. A Forbes article released in May 2014 details what other factors may be responsible for these noticeable trends in California.

Home price increases have pros and cons: they can take people ‘above water’ from an underwater mortgage, but it can also – and it is – making it more of a challenge for Californians to find affordable housing. Forbes stated, “Along the California coast, it’s not merely challenging to find reasonably priced real estate – it’s nearly impossible. From San Diego to Los Angeles to San Francisco, home values are rapidly rising and a confluence of factors will likely continue to drive the market even higher”. The first factor discussed has been around for over 30 years. In 1978, California voters passed Proposition 13. Proposition 13 caps California property taxes at 1.25% and assesses the property’s 1975 value and restricts annual increases of assessed value not to exceed 2% per year. Reassessment of the property value is prohibited on a new base year except for the following cases: change of ownership, or completion of new construction. This proposition discourages older homeowners from wanting to sell their homes as it restricts inventory and drives up home prices. While low property taxes are enticing, it is important to note its effect on the grand scheme of things.

The popular areas in California are also incredibly dense, meaning that everyone migrates toward certain areas. Properties and land are hard to come by in popular areas such as San Diego, Los Angeles, and San Francisco. In these areas when new construction is built it typically is more expensive than the previous house as it is brand new, it drives up the home values of all of the surrounding homes, thus pricing more people out of the market. These areas are also heavily composed of coastal areas, also driving up the value of the property. Los Angeles Daily News reported, “Southern California’s housing prices hit their highest level in 77 months during June”. The article went on to detail that the median home price of homes and condominiums in the Southern California region rose 8% in one month between May and June from $410,000 to $415,000. For the most part, (Southern) Californians prefer to enjoy a beach lifestyle.

At this time, the houses on the market are more likely than not being swooped up by investors. After the Real Estate market plummeted, investors became incredibly active in the middle-range home market, picking up foreclosed homes and short sales at low prices so that they could rent them out. Investment properties are hugely common in California, and are much easier to come by then homes for purchase. As Forbes puts it, investors were “further squeezing what little affordable inventory exists within these markets”. Premier global investment group, The Blackstone Group in particular has participated in this type of activity more than many would guess a large company has. The same Forbes article notes, “When the market hit bottom, Blackstone swooped in and acquired thousands of distressed properties in downtrodden areas such as Phoenix, Las Vegas, and the Inland Empire (California). It now earns duel streams of revenue off those investments: rental income and by bundling the mortgages of such properties into securities and selling them to investors”.

Investment properties are without a doubt more prominent now in California. However, Americans haven’t been the only ones getting their fix on the California housing market. Forbes reveals a lot of information with regards to foreign buyers and their responsibility in the current inflation of home prices that we are observing. Wealthy foreign investors are interested in American properties so that they can protect their money with a US based tangible asset. The reason why they have been so prevalent is because they make all-cash offers that are nearly impossible to turn down. These foreign buyers are also going above market prices in their offers, which does all but hinder the hiked up home prices for all of those properties that are not strictly investment properties. Forbes mentions that Zillow, perceived as the Google of the Real Estate market has “recently announce that its platform will be available to a select group of brokers working in China, which is ground zero for the foreign buyers that are now penetrating luxury, high-end markets with all cash offers”. Simply put: more foreigners are being welcomed into the market with open arms, so don’t expect things to change very much any time soon.

As home prices in California continue to climb due to the work of multiple factors, many residents of the sunny state are forced into rental properties, for which prices are increasing as well as there is a high demand. Homebuyers are not necessarily in the best position right now, but investors may certainly realize the upside of said market. On the bright side, however, The Los Angeles Daily News contends that we can rest easy when considering a Real Estate bubble in California: “Prices are expected to increase but not outrun the market, which is what led to the last collapse. Pent-up demand, job growth, and still-low mortgage rates continue to put pressure on home prices, but their climbing at a much slower pace than a year ago. In many markets, price appreciation has slipped into the more sustainable single-digit range, compared with gains exceeding 20 percent this time last year”.

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